ABA Weighs in Against Private Insurance in Washington State

OLYMPIA, Wash. -- American Bankers Association Senior Economist Keith Leggett has written the Washington State Department of Financial Institutions in opposition to its proposal to permit private primary deposit insurance for credit unions based on the public policy implications of a failure.

"From a public policy perspective, it is important for the DFI to consider the economic disruption that would arise should a private primary insurer's reserves prove inadequate and also whether taxpayers will be at risk," he wrote in a letter dated July 31.

"History demonstrates that private primary deposit insurers in the past have lacked the liquidity necessary to withstand a large concentration of financial institution failures." He cited a Government Accountability Office report and comment from former Federal Reserve Board Chairman Alan Greenspan that pointed out the risks of private primary deposit insurance.

Leggett also pointed to the lack of geographic diversification. "Furthermore, sound insurance underwriting practices advocate the diversification of risk. However, private share insurance has limited geographic diversification, unlike federal deposit insurance," he wrote. "Only nine states actively authorize state-chartered credit unions to have private primary share insurance. Three states (CA, IL, and NV) account for almost 75 percent of insured deposit exposure, and 42 percent of insured deposits are in California alone. This means a private share insurer is highly susceptible to local economic shocks."

ABA also expressed concern that credit unions could adopt private insurance to avoid capital triggers for Prompt Corrective Act and the 12.25% business loan cap. "Doing so would allow privately insured credit unions to engage in riskier activities, while lowering the minimum amount of capital they would be required to hold against potential risks, a combustible combination fraught with potential for financial disaster," Leggett stated.

This position creates a strange bedfellow for NAFCU, which has come out strongly in the past against private primary deposit insurance. NAFCU has not officially commented in Washington yet, but Senior Counsel and Director of Regulatory Affairs Carrie Hunt has said the group plans to submit a letter.

"NAFCU believes that shares backed by federal insurance is the best means to protect members' savings because it is backed by the full faith and credit of the United States Government," she said. "We expect that the regulator in Washington State will consider the ABA's comments in addition to the other comments provided to date as it works through the rulemaking process."

On the other hand, CUNA has historically been an advocate of choice and plans to comment as well, is in line with comments from the affiliated Washington Credit Union League, which at the prompting of some member credit unions, has advocated for enabling regulation in this area.

While supportive of the regulatory change to allow for private primary deposit insurance, the league has highlighted four remaining issues it has with the Department of Financial Institutions' proposal on private deposit insurance.

First, WCUL President/CEO John Annaloro wrote in a comment letter that there is no reason for a private insurer to seek licensure from the insurance regulator, as the legislature entrusted that to DFI in writing the law permitting private insurance.

League Wants Due Process

WCUL expressed concern that the regulator can revoke the approval of an insurance provider without the normal nonpublic due process, including notification and supervisory hearings. "The League has a reasonable worry that a future Director could make an arbitrary or hasty adverse finding based on matters outside of safety and soundness or fact. Following the procedures under the proposed rule, before this decision is reviewed and determined to be unfounded, the damage to the effected credit unions and the state system as a whole will have already been done," Annaloro wrote.

The league would also like to see tweaks to the provisions concerning adequacy of reserves and discounted cries from opponents with regard to a lack of geographic diversity. "The League's concerns derive from both a mathematical or mechanical perspective as well as a philosophical or operational one," Annaloro said.

He continued, "First, it seems that the adequacy of a nonfederal fund's reserves could be best determined by independent professional actuaries who are in the business of opining as to reserves and capital." If the draft stress tests are required in the final rule, the league asked that loss experience be heavily weighed in those considerations. The league retained the help of well-known Washington, D.C. banking consultant Bert Ely for a report on risk and diversity, which is attached to its letter.

Annaloro added, "By setting standards in the rules that measure diversity based on the entire country, the DFI fails to consider the fact that unlike federal insurance private share insurance is not permissible in every state. Also, the draft rules fail to recognize the importance of a fund's underlying risk diversification based on underlying sponsorship/membership mix. Escalating unemployment within a credit union's membership base can be more concerning than regional economic risk."

Though the ABA has now written on the issue in Washington, the Washington Bankers Association and the Washington Independent Bankers Association appear fed up with what they perceive as the regulator ignoring their comments throughout the process. "We had anticipated this process to be deliberative," the groups wrote. "We had expected this process to be a fair exchange of ideas. It has been neither. It appears that extending the process has provided no added value. We see little reason to continue to participate in a process that rings hollow unless there are material process improvements. Please respond to our issues in a thoughtful and deliberative manner. We have afforded you that courtesy, we expect the same."

However, on the flip side interested credit unions are pushing through. Woodstone Credit Union President/CEO Susan Streifel pointed out that American Share Insurance, the sole private primary deposit insurer, has been in business for 30 years with no losses or unpaid claims. "Is it possible to use this company as a benchmark to 'test' the rules?" she asked.

ASI President/CEO Dennis Adams also challenged the stress tests "suggested by the NCUA that were developed over 10 years ago based on irrelevant outdated information and the application of impractical loss exposure assumptions." He pointed out that the stress tests place the emphasis on larger credit unions while most losses actually occur--for both NCUA and ASI--at smaller credit unions. ASI also sought to adjust many of the definitions in the draft proposal, including "access to additional sources of funds," "reserves" which ASI said it fails to define, "failure," "recover," and a number of others.

School Employees Credit Union of Washington's Sandra Kurack wrote in her comment letter, "From the discussions and draft rules so far, it appears the State would be holding a private company to a higher standard than the NCUSIF; and unintentionally complicating the rule such that a private insurer may be unwilling to even attempt an application."